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© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Long-lived assets acquired for use in business operations.
Long-lived assets acquired for use in business operations.
Similar to long-term prepaid expenses
The cost of plant assets is the advance purchase
of services.
As years pass, and the services are used, the cost is transferred to depreciation expense.
Plant AssetsPlant Assets
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Major Categories of Plant AssetsMajor Categories of Plant Assets
L an d , b u ild in g s ,eq u ip m en t,
fu rn itu re , fixtu res .
L on g -te rmasse ts h avin g
p h ys ica l su b s tan ce .
Tangible PlantAssets
P aten ts , cop yrig h ts ,trad em arks ,
fran ch ises , g ood w ill.
N on cu rren t asse tsw ith n o p h ys ica l
su b s tan ce .
IntangibleAssets
O il reserves ,t im b er, o th er
m in era ls .
S ites acq u ired fo rextrac tin g va lu ab le
resou rces .
NaturalResources
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Acquisition.Acquisition.Allocation of the acquisition cost Allocation of the acquisition cost
to expense over the asset’s to expense over the asset’s useful life (depreciation).useful life (depreciation).
Sale or disposal.Sale or disposal.
Acquisition.Acquisition.Allocation of the acquisition cost Allocation of the acquisition cost
to expense over the asset’s to expense over the asset’s useful life (depreciation).useful life (depreciation).
Sale or disposal.Sale or disposal.
Accountable EventsAccountable Events
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Learning ObjectiveLearning Objective
LO1
To determine the cost of plant
assets.
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Asset price
Asset price
. . . for getting the asset to the
desired location.
. . . for getting the asset to the
desired location.
. . . for getting the asset ready
for use.
. . . for getting the asset ready
for use.
CostCost
Acquisition of Plant AssetsAcquisition of Plant Assets
=Reasonable and
necessary costs . . .
Reasonable and necessary costs . . .
+
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On May 4, Heat Co., a stove maker, buys a new On May 4, Heat Co., a stove maker, buys a new machine from Supply Co. The new machine machine from Supply Co. The new machine
has a price of $52,000. Sales tax is 8%.has a price of $52,000. Sales tax is 8%.Heat Co. pays $500 shipping cost to get the Heat Co. pays $500 shipping cost to get the
machine to its plant. After the machine machine to its plant. After the machine arrives, set-up costs of $1,300 are incurred, arrives, set-up costs of $1,300 are incurred,
along with $4,000 in testing costs.along with $4,000 in testing costs.
Compute the cost of Heat Co.’s new machine.Compute the cost of Heat Co.’s new machine.
On May 4, Heat Co., a stove maker, buys a new On May 4, Heat Co., a stove maker, buys a new machine from Supply Co. The new machine machine from Supply Co. The new machine
has a price of $52,000. Sales tax is 8%.has a price of $52,000. Sales tax is 8%.Heat Co. pays $500 shipping cost to get the Heat Co. pays $500 shipping cost to get the
machine to its plant. After the machine machine to its plant. After the machine arrives, set-up costs of $1,300 are incurred, arrives, set-up costs of $1,300 are incurred,
along with $4,000 in testing costs.along with $4,000 in testing costs.
Compute the cost of Heat Co.’s new machine.Compute the cost of Heat Co.’s new machine.
Determining CostDetermining Cost
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Improvements to land such as driveways,
fences, and landscaping are recorded separately.
Improvements to land such as driveways,
fences, and landscaping are recorded separately.
Cost includes real estate commissions, escrow
fees, legal fees, clearing and grading the property.
Cost includes real estate commissions, escrow
fees, legal fees, clearing and grading the property.
Land Improvements
Land Improvements
LandLand
Special ConsiderationsSpecial Considerations
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Repairs made prior to the building being put in use are considered part of the
building’s cost.
Repairs made prior to the building being put in use are considered part of the
building’s cost.
BuildingsBuildings
Special ConsiderationsSpecial Considerations
EquipmentEquipment
Related interest, insurance, and property
taxes are treated as expenses of the current
period.
Related interest, insurance, and property
taxes are treated as expenses of the current
period.
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I think I’ll buy the whole thing;
building, land, and contents.
Special ConsiderationsSpecial Considerations
The allocation is based on the relative Fair Market
Value of each asset
purchased.
The allocation is based on the relative Fair Market
Value of each asset
purchased.
The total cost must be
allocated to separate
accounts for each asset.
The total cost must be
allocated to separate
accounts for each asset.
Allocation of a Lump-Sum PurchaseAllocation of a Lump-Sum Purchase
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Learning ObjectiveLearning Objective
LO2
To distinguish between capital and
revenue expenditures.
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CapitalCapitalExpenditureExpenditure
CapitalCapitalExpenditureExpenditure
RevenueRevenueExpenditureExpenditureRevenueRevenue
ExpenditureExpenditure
Any material expenditureAny material expenditurethat will benefit severalthat will benefit several
accounting periods.accounting periods.
Any material expenditureAny material expenditurethat will benefit severalthat will benefit several
accounting periods.accounting periods.
To To capitalizecapitalize an expenditure an expendituremeans to charge it to anmeans to charge it to an
asset accountasset account..
To To capitalizecapitalize an expenditure an expendituremeans to charge it to anmeans to charge it to an
asset accountasset account..
Expenditure forExpenditure forordinary repairsordinary repairs
and maintenanceand maintenance..
Expenditure forExpenditure forordinary repairsordinary repairs
and maintenanceand maintenance..
ToTo expense expense an expenditure an expendituremeans to charge it to anmeans to charge it to an
expense accountexpense account..
ToTo expense expense an expenditure an expendituremeans to charge it to anmeans to charge it to an
expense accountexpense account..
Capital Expenditures and Revenue Expenditures
Capital Expenditures and Revenue Expenditures
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The allocation of the cost of a plant asset to expense in the The allocation of the cost of a plant asset to expense in the periods in which services are received from the asset.periods in which services are received from the asset.
The allocation of the cost of a plant asset to expense in the The allocation of the cost of a plant asset to expense in the periods in which services are received from the asset.periods in which services are received from the asset.
Cost of plant
assets
Balance SheetBalance Sheet
Assets: Plant and equipment
Assets: Plant and equipment
Income StatementIncome Statement
Revenues:Expenses: Depreciation
Revenues:Expenses: Depreciation
as the services are received
DepreciationDepreciation
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Book Value
• Cost – Accumulated DepreciationDepreciation
• Contra-asset• Represents the portion of an asset’s
cost that has alreadybeen allocated to expense.
Causes of Depreciation
• Physical deterioration• Obsolescence
Book Value
• Cost – Accumulated DepreciationDepreciation
• Contra-asset• Represents the portion of an asset’s
cost that has alreadybeen allocated to expense.
Causes of Depreciation
• Physical deterioration• Obsolescence
DepreciationDepreciation
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Learning ObjectiveLearning Objective
LO3
To compute depreciation by the
straight-line and declining-balance
methods.
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Cost - Residual Value
Years of Useful Life
Depreciation
Expense per Year=
Straight-Line DepreciationStraight-Line Depreciation
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On January 1, 2007, Bass Co. buys new equipment. On January 1, 2007, Bass Co. buys new equipment. Bass pays a total of $24,000 for the equipment. The Bass pays a total of $24,000 for the equipment. The equipment has an estimated residual value of $3,000 equipment has an estimated residual value of $3,000
and an estimated useful life of 5 years.and an estimated useful life of 5 years.Compute depreciation for 2007 using the straight-line Compute depreciation for 2007 using the straight-line
method.method.
On January 1, 2007, Bass Co. buys new equipment. On January 1, 2007, Bass Co. buys new equipment. Bass pays a total of $24,000 for the equipment. The Bass pays a total of $24,000 for the equipment. The equipment has an estimated residual value of $3,000 equipment has an estimated residual value of $3,000
and an estimated useful life of 5 years.and an estimated useful life of 5 years.Compute depreciation for 2007 using the straight-line Compute depreciation for 2007 using the straight-line
method.method.
Straight-Line DepreciationStraight-Line Depreciation
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Bass Co. will record $4,200 depreciation each year for five Bass Co. will record $4,200 depreciation each year for five years. Total depreciation over the estimated useful life of years. Total depreciation over the estimated useful life of
the equipment is:the equipment is:
Bass Co. will record $4,200 depreciation each year for five Bass Co. will record $4,200 depreciation each year for five years. Total depreciation over the estimated useful life of years. Total depreciation over the estimated useful life of
the equipment is:the equipment is:
Salvage ValueSalvage Value
Straight-Line DepreciationStraight-Line Depreciation
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When an asset is acquired during the year, depreciation When an asset is acquired during the year, depreciation in the year of acquisition must be prorated.in the year of acquisition must be prorated.
When an asset is acquired during the year, depreciation When an asset is acquired during the year, depreciation in the year of acquisition must be prorated.in the year of acquisition must be prorated.
Half-Year ConventionIn the year of
acquisition, record six months of depreciation.
Half-Year ConventionIn the year of
acquisition, record six months of depreciation. ½½
Depreciation for Fractional PeriodsDepreciation for Fractional Periods
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Half-Year ConventionHalf-Year Convention
Using the half-year convention, calculate the Using the half-year convention, calculate the straight-line depreciation on December 31, 2007, straight-line depreciation on December 31, 2007,
for equipment purchased in 2007. The for equipment purchased in 2007. The equipment cost $75,000, has a useful life of 10 equipment cost $75,000, has a useful life of 10
years and an estimated residual value of $5,000.years and an estimated residual value of $5,000.
Using the half-year convention, calculate the Using the half-year convention, calculate the straight-line depreciation on December 31, 2007, straight-line depreciation on December 31, 2007,
for equipment purchased in 2007. The for equipment purchased in 2007. The equipment cost $75,000, has a useful life of 10 equipment cost $75,000, has a useful life of 10
years and an estimated residual value of $5,000.years and an estimated residual value of $5,000.
Depreciation = ($75,000 - $5,000) ÷ 10
= $7,000 for a full year
Depreciation = $7,000 × 1/2 = $3,500
Depreciation = ($75,000 - $5,000) ÷ 10
= $7,000 for a full year
Depreciation = $7,000 × 1/2 = $3,500
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Depreciation in the early years of an asset’s estimated useful life is higher than in later years.
Depreciation in the early years of an asset’s estimated useful life is higher than in later years.
The double-declining balance depreciation rate is 200% of the straight-line
depreciation rate of (1÷Useful Life).
The double-declining balance depreciation rate is 200% of the straight-line
depreciation rate of (1÷Useful Life).
Declining-Balance MethodDeclining-Balance Method
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On January 1, 2007, Bass Co. buys a new delivery truck. On January 1, 2007, Bass Co. buys a new delivery truck. Bass Co. pays $24,000 for the truck. The truck has an Bass Co. pays $24,000 for the truck. The truck has an
estimated residual value of $3,000 and an estimated useful estimated residual value of $3,000 and an estimated useful life of 5 years.life of 5 years.
Compute depreciation for 2007 using the double-Compute depreciation for 2007 using the double-declining balance method.declining balance method.
On January 1, 2007, Bass Co. buys a new delivery truck. On January 1, 2007, Bass Co. buys a new delivery truck. Bass Co. pays $24,000 for the truck. The truck has an Bass Co. pays $24,000 for the truck. The truck has an
estimated residual value of $3,000 and an estimated useful estimated residual value of $3,000 and an estimated useful life of 5 years.life of 5 years.
Compute depreciation for 2007 using the double-Compute depreciation for 2007 using the double-declining balance method.declining balance method.
Declining-Balance MethodDeclining-Balance Method
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Compute depreciation for the rest of the Compute depreciation for the rest of the truck’s estimated useful life. truck’s estimated useful life.
Compute depreciation for the rest of the Compute depreciation for the rest of the truck’s estimated useful life. truck’s estimated useful life.
Declining-Balance MethodDeclining-Balance Method
Total depreciation over the estimated useful life of an asset is the same using either the straight-line method or
the declining-balance method.
Total depreciation over the estimated useful life of an asset is the same using either the straight-line method or
the declining-balance method.
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Estimates of Useful Life and Residual Value• May differ from company to
company.• The reasonableness of
management’s estimates is evaluated by external auditors.
Principle of Consistency• Companies should avoid
switching depreciation methods from period to period.
Estimates of Useful Life and Residual Value• May differ from company to
company.• The reasonableness of
management’s estimates is evaluated by external auditors.
Principle of Consistency• Companies should avoid
switching depreciation methods from period to period.
Financial Statement DisclosuresFinancial Statement Disclosures
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So depreciationis an estimate.
So depreciationis an estimate.
Predicted salvage value
Predicted salvage value
Predicteduseful life
Predicteduseful life
Over the life of an asset, new information may come to light that indicates the
original estimates need to be revised.
Over the life of an asset, new information may come to light that indicates the
original estimates need to be revised.
Revising Depreciation RatesRevising Depreciation Rates
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Revising Depreciation RatesRevising Depreciation Rates
On January 1, 2004, equipment was purchased that cost $30,000, has a useful
life of 10 years and no salvage value. During 2007, the useful life was revised to
8 years total (5 years remaining).
Calculate depreciation expense for the year ended December 31, 2007, using the
straight-line method.
On January 1, 2004, equipment was purchased that cost $30,000, has a useful
life of 10 years and no salvage value. During 2007, the useful life was revised to
8 years total (5 years remaining).
Calculate depreciation expense for the year ended December 31, 2007, using the
straight-line method.
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When our estimates change, depreciation is:
When our estimates change, depreciation is:
Book value at date of change
Salvage value at date of change
Remaining useful life at date of change
–
Revising Depreciation RatesRevising Depreciation Rates
Asset cost 30,000$ Accumulated depreciation, 12/31/2006 ($3,000 per year × 3 years) 9,000 Remaining book value 21,000$ Divide by remaining life ÷ 5Revised annual depreciation 4,200$
Asset cost 30,000$ Accumulated depreciation, 12/31/2006 ($3,000 per year × 3 years) 9,000 Remaining book value 21,000$ Divide by remaining life ÷ 5Revised annual depreciation 4,200$
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If the cost of an asset cannot be recovered through future use or sale, the asset should be written down to its net realizable value.
If the cost of an asset cannot be recovered through future use or sale, the asset should be written down to its net realizable value.
Impairment of Plant AssetsImpairment of Plant Assets
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Learning ObjectiveLearning Objective
LO4
To account for disposals of plant
assets.
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Update depreciation to the date of disposal.
Update depreciation to the date of disposal.
Recording cashreceived (debit).Recording cashreceived (debit).
Removing accumulateddepreciation (debit).
Removing accumulateddepreciation (debit).
Removing the asset cost (credit).
Removing the asset cost (credit).
Recording again (credit)
or loss (debit).
Recording again (credit)
or loss (debit).
Disposal of Plant and EquipmentDisposal of Plant and Equipment
Journalize disposal by: Journalize disposal by:
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If Cash > BV, record a gain (credit).
If Cash < BV, record a loss (debit).
If Cash = BV, no gain or loss.
If Cash > BV, record a gain (credit).
If Cash < BV, record a loss (debit).
If Cash = BV, no gain or loss.
Recording cashreceived (debit).Recording cashreceived (debit).
Removing accumulateddepreciation (debit).
Removing accumulateddepreciation (debit).
Removing the asset cost (credit).
Removing the asset cost (credit).
Recording again (credit)
or loss (debit).
Recording again (credit)
or loss (debit).
Disposal of Plant and EquipmentDisposal of Plant and Equipment
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On September 30, 2007, Evans Company sells a machine that originally cost $100,000 for
$60,000 cash. The machine was placed in service on January 1, 2002. It has been
depreciated using the straight-line method with an estimated salvage value of $20,000 and an
estimated useful life of 10 years.
Let’s answer the following questions.
On September 30, 2007, Evans Company sells a machine that originally cost $100,000 for
$60,000 cash. The machine was placed in service on January 1, 2002. It has been
depreciated using the straight-line method with an estimated salvage value of $20,000 and an
estimated useful life of 10 years.
Let’s answer the following questions.
Disposal of Plant and EquipmentDisposal of Plant and Equipment
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The amount of depreciation recorded on September 30, 2007,
to bring depreciation up to date is:
a. $8,000.
b. $6,000.
c. $4,000.
d. $2,000.
The amount of depreciation recorded on September 30, 2007,
to bring depreciation up to date is:
a. $8,000.
b. $6,000.
c. $4,000.
d. $2,000.
Annual Depreciation:($100,000 - $20,000) ÷ 10 Yrs. = $8,000
Depreciation to Sept. 30:9/12 × $8,000 = $6,000
Disposal of Plant and EquipmentDisposal of Plant and Equipment
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After updating the depreciation, the machine’s book value on September 30, 2007, is:
a. $54,000.
b. $46,000.
c. $40,000.
d. $60,000.
After updating the depreciation, the machine’s book value on September 30, 2007, is:
a. $54,000.
b. $46,000.
c. $40,000.
d. $60,000.
Cost 100,000$ Accumulated Depreciation: (5 yrs. × $8,000) + $6,000 = 46,000
Book Value 54,000$
Cost 100,000$ Accumulated Depreciation: (5 yrs. × $8,000) + $6,000 = 46,000
Book Value 54,000$
Disposal of Plant and EquipmentDisposal of Plant and Equipment
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The machine’s sale resulted in:
a. a gain of $6,000.
b. a gain of $4,000.
c. a loss of $6,000.
d. a loss of $4,000.
The machine’s sale resulted in:
a. a gain of $6,000.
b. a gain of $4,000.
c. a loss of $6,000.
d. a loss of $4,000. Cost 100,000$ Accum. Depr. 46,000 Book value 54,000$ Cash received 60,000 Gain 6,000$
Disposal of Plant and EquipmentDisposal of Plant and Equipment
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Disposal of Plant and EquipmentDisposal of Plant and Equipment
Prepare the journal entry to record the sale.
Prepare the journal entry to record the sale.
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On May 30, 2007, Essex Company On May 30, 2007, Essex Company exchanges a used airplane and $35,000 exchanges a used airplane and $35,000 cash for a new airplane. The old airplane cash for a new airplane. The old airplane
originally cost $40,000, had up-to-date originally cost $40,000, had up-to-date accumulated depreciation of $30,000, and accumulated depreciation of $30,000, and
a fair value of $4,000. a fair value of $4,000.
On May 30, 2007, Essex Company On May 30, 2007, Essex Company exchanges a used airplane and $35,000 exchanges a used airplane and $35,000 cash for a new airplane. The old airplane cash for a new airplane. The old airplane
originally cost $40,000, had up-to-date originally cost $40,000, had up-to-date accumulated depreciation of $30,000, and accumulated depreciation of $30,000, and
a fair value of $4,000. a fair value of $4,000.
Trading in Used Assets for New Ones
Trading in Used Assets for New Ones
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The exchange resulted in a:
a. gain of $6,000.
b. loss of $6,000.
c. loss of $4,000.
d. gain of $4,000.
The exchange resulted in a:
a. gain of $6,000.
b. loss of $6,000.
c. loss of $4,000.
d. gain of $4,000.
Cost 40,000$ Accum. Depr. 30,000
Book Value 10,000$ Fair Value 4,000
Loss 6,000$
Prepare a journal entry to record the exchange.
Trading in Used Assets for New Ones
Trading in Used Assets for New Ones
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Trading in Used Assets for New Ones
Trading in Used Assets for New Ones
Prepare the journal entry to record the trade.
Prepare the journal entry to record the trade.
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Learning ObjectiveLearning Objective
LO5
To explain the nature of intangible assets, including goodwill.
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Noncurrent assetsNoncurrent assetswithout physicalwithout physical
substance.substance.
Noncurrent assetsNoncurrent assetswithout physicalwithout physical
substance.substance.
Useful life isUseful life isoften difficultoften difficultto determine.to determine.
Useful life isUseful life isoften difficultoften difficultto determine.to determine.
Usually acquiredUsually acquired for operational for operational
use. use.
Usually acquiredUsually acquired for operational for operational
use. use.
Often provideOften provideexclusive rightsexclusive rights
or privileges.or privileges.
Often provideOften provideexclusive rightsexclusive rights
or privileges.or privileges.
Intangible AssetsIntangible Assets
CharacteristicsCharacteristics
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Patents Copyrights Leaseholds Leasehold
Improvements Goodwill Trademarks and
Trade Names
Record at current cash
equivalent cost, including
purchase price, legal fees, and
filing fees.
Intangible AssetsIntangible Assets
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• Amortization is the systematic write-off to Amortization is the systematic write-off to expense of the cost of intangible assets expense of the cost of intangible assets over their useful life or legal life, over their useful life or legal life, whichever is shorter. whichever is shorter.
• Use the straight-line method to amortize Use the straight-line method to amortize most intangible assets.most intangible assets.
• Amortization is the systematic write-off to Amortization is the systematic write-off to expense of the cost of intangible assets expense of the cost of intangible assets over their useful life or legal life, over their useful life or legal life, whichever is shorter. whichever is shorter.
• Use the straight-line method to amortize Use the straight-line method to amortize most intangible assets.most intangible assets.
AmortizationAmortization
Date Description Debit CreditAmortization Expense $$$$$ Intangible Asset $$$$$
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The amount by which thepurchase price exceeds the fair
market value of net assets acquired.
The amount by which thepurchase price exceeds the fair
market value of net assets acquired.
Occurs when onecompany buys
another company.
Occurs when onecompany buys
another company.
Only purchased goodwill is an
intangible asset.
Only purchased goodwill is an
intangible asset.
GoodwillGoodwill
Goodwill is NOT amortized. It is tested annually to determine if there has been
an impairment loss.
Goodwill is NOT amortized. It is tested annually to determine if there has been
an impairment loss.
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Exclusive right grantedby federal government to sell or
manufacture an invention.
Exclusive right grantedby federal government to sell or
manufacture an invention.
Cost is purchaseprice plus legalcost to defend.
Cost is purchaseprice plus legalcost to defend.
Amortize costover the shorter of
useful life or 20 years.
Amortize costover the shorter of
useful life or 20 years.
PatentsPatents
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A symbol, design, or logo associated with a business.
A symbol, design, or logo associated with a business.
Purchasedtrademarks
are recordedat cost, and
amortized overshorter of legal
or economic life.
Internallydevelopedtrademarks
have norecorded
asset cost.
Trademarks and Trade NamesTrademarks and Trade Names
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Legally protected right to sell products or provide services purchased by franchisee
from franchisor.
Legally protected right to sell products or provide services purchased by franchisee
from franchisor.
Purchase price is intangible asset which is amortized over the shorter of
the protected right or useful life.
Purchase price is intangible asset which is amortized over the shorter of
the protected right or useful life.
FranchisesFranchises
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Exclusive right granted by the federal government to protect
artistic or intellectual properties.
Exclusive right granted by the federal government to protect
artistic or intellectual properties.
Amortize costover period benefited.
Amortize costover period benefited.
Legal life islife of creatorplus 70 years.
Legal life islife of creatorplus 70 years.
CopyrightsCopyrights
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All expenditures classified as research and All expenditures classified as research and development should be charged to development should be charged to
expense when incurred.expense when incurred.
All expenditures classified as research and All expenditures classified as research and development should be charged to development should be charged to
expense when incurred.expense when incurred.
Research and Development CostsResearch and Development Costs
All of these R&D costs will really reduce our net income this year!
All of these R&D costs will really reduce our net income this year!
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Learning ObjectiveLearning Objective
LO6
To account for the depletion of natural
resources.
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Total cost,including
exploration anddevelopment,is charged to
depletion expenseover periods
benefited.
Total cost,including
exploration anddevelopment,is charged to
depletion expenseover periods
benefited.
Examples: oil, coal, goldExamples: oil, coal, gold
Extracted fromthe natural
environmentand reportedat cost less
accumulateddepletion.
Extracted fromthe natural
environmentand reportedat cost less
accumulateddepletion.
Natural ResourcesNatural Resources
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Depletion is calculated using theunits-of-production method.
Unit depletion rate is calculated as follows:
Total Units of Natural Resource
Cost – Residual Value
Depletion of Natural ResourcesDepletion of Natural Resources
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Total depletion cost for a period is:
Unit Depletion
Rate
Number of Units
Extracted in Period×
Totaldepletion
cost
Totaldepletion
cost
Inventoryfor sale
Inventoryfor sale
UnsoldInventory
UnsoldInventory
Cost ofgoods sold
Cost ofgoods sold
Depletion of Natural ResourcesDepletion of Natural Resources
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Specialized plant assets may be required to Specialized plant assets may be required to extract the natural resource.extract the natural resource.
These assets should be depreciated over These assets should be depreciated over their normal useful lives or over the life of their normal useful lives or over the life of the natural resource, whichever is shorter.the natural resource, whichever is shorter.
Specialized plant assets may be required to Specialized plant assets may be required to extract the natural resource.extract the natural resource.
These assets should be depreciated over These assets should be depreciated over their normal useful lives or over the life of their normal useful lives or over the life of the natural resource, whichever is shorter.the natural resource, whichever is shorter.
Depletion of Natural ResourcesDepletion of Natural Resources
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Learning ObjectiveLearning Objective
LO7
To explain the cash effect of transactions
involving plant assets.
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Plant Transactions and theStatement of Cash Flows
Plant Transactions and theStatement of Cash Flows
Cash payments for plant assets represent a cash Cash payments for plant assets represent a cash outflow for investing activities on the statement of outflow for investing activities on the statement of cash flows. A disposal of a plant asset for cash cash flows. A disposal of a plant asset for cash
results in a cash inflow to the company.results in a cash inflow to the company.
Cash payments for plant assets represent a cash Cash payments for plant assets represent a cash outflow for investing activities on the statement of outflow for investing activities on the statement of cash flows. A disposal of a plant asset for cash cash flows. A disposal of a plant asset for cash
results in a cash inflow to the company.results in a cash inflow to the company.
Depreciation is a Depreciation is a non-cash charge to non-cash charge to income and has no income and has no
effect on cash flows.effect on cash flows.
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Learning ObjectiveLearning Objective
LO8
To account for depreciation using methods other than
straight-line or declining-balance.
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Other Depreciation MethodsOther Depreciation Methods
Units-of-Output Method
Cost Cost – Residual Value– Residual ValueEstimated Units of OutputEstimated Units of Output
Depreciation costDepreciation costper unit of outputper unit of output==
MACRSModified Accelerated Cost Recovery System
The depreciation system used on federalThe depreciation system used on federalincome tax returns. It is an accelerated method.income tax returns. It is an accelerated method.
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Other Depreciation MethodsOther Depreciation Methods
Sum-of-the-Years’ Digits Method
In general, depreciation calculated under this In general, depreciation calculated under this accelerated method falls between the double-accelerated method falls between the double-declining amount and 150-percent-declining declining amount and 150-percent-declining method. It is not used by many companies method. It is not used by many companies because the computations are complex.because the computations are complex.
In general, depreciation calculated under this In general, depreciation calculated under this accelerated method falls between the double-accelerated method falls between the double-declining amount and 150-percent-declining declining amount and 150-percent-declining method. It is not used by many companies method. It is not used by many companies because the computations are complex.because the computations are complex.
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
A survey of 600 Publicly Owned Corporations
579
22
5
44
32
9
Straight-line
Declining-balance
Sum-of-the-years'-digits
Accelerated methods (not specified)
Units-of-output
Other
A survey of 600 Publicly Owned Corporations
579
22
5
44
32
9
Straight-line
Declining-balance
Sum-of-the-years'-digits
Accelerated methods (not specified)
Units-of-output
Other
Depreciation Methods in Use:A Survey
Depreciation Methods in Use:A Survey